Why Warren Buffett wants to become a car salesman

NEW YORK (MarketWatch)—In this era of Uber and carless millennials, why is America’s most famous investor jumping into the car-dealership business?

Well, the business isn’t what you may think it is, and the new threats to it are overhyped, according to industry experts.

A dealership mostly makes its money from its parts, service, financing and insurance operations, says Brian Sponheimer, a Gabelli & Co. analyst. Parts and service can provide as much as 45% of gross profit, while finance and insurance can deliver 15%, and that means just 40% comes from sales of new and used vehicles.

“Mr. Buffett probably saw what we see, in that dealers are tremendous cash-flow generators capable of enjoying the good times in auto sales and enduring the bad times when new-vehicle sales get more lean,” Sponheimer told MarketWatch.

Car dealers can handle periods with weak sales. They pay less in sales commissions and rely more on other operations. They focus on servicing cars, getting paid by the vehicles’ owners, of course, but also by auto makers for warranty work.

“That’s an easy story to write that’s kind of sexy,” says Avi Steinlauf, CEO of the car-shopping site Edmunds.com. He said there are “elements of truth” to the story, but he doesn’t “see automotive retail disappearing.”

About 16.5 million new cars are expected to be sold this year in the U.S., Steinlauf added. Car sales have bounced back from a 2009 low, though they’re still off their 2005 peak, according to Edmunds.com data.

“Ultimately, millennials will get married and have children, and they’re not going to be waiting for an Uber to put in a car seat or to get to work,” Sponheimer said. “At the margin, in urban areas, you may see a small effect.”

The move by Buffett’s Berkshire Hathaway Inc.
BRK.A, +3.01%
to acquire Van Tuyl Group, the fifth-largest auto dealership firm in the U.S., also gives Berkshire a vehicle for making an even bigger move into a fragmented industry viewed as ripe for consolidation, and it’s another example of a family-owned business turning to Buffett.

“Berkshire gets a platform on which they can build,” Steinlauf said. The 10 largest dealer groups are estimated to account for less than 8% of overall new vehicle sales.

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